SANKHY? THE INDIAN JOURNAL OF STATISTICS
Edited by : P. C. MAHALANOBIS
Vol. 17, Part 4 February 1957
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
By OSKAR LANGE School of Planning and Statistics, Warsaw
1. The scope of input-output analysis
The analysis of inter-industry relations, usually referred to as input-output analysis, serves the purpose of establishing the quantitative relations between vari ous branches of production which must be maintained in order to assure a smooth flow of production in the national economy. It studies the conditions of mutual consistency of the outputs of the various branches of the national economy which result from the fact that the output of one branch is the source of input in other branches.
The idea that certain proportions must be maintained between the outputs of various branches of the national economy is at the basis of the equilibrium analysis of classical political economy and neo-classical economics. The proportions referred to are, however, conceived by classical and neo-classical economic theory basically in 'horizontal' terms, i.e., as proportions between final products designed to satisfy the wants of consumers. Under conditions of competitive capitalism, of free mobi lity of capital, the tendency of the rate of profit towards a 'normal' level in each branch of the national economy leads towards an equilibrium of output of the various branches. In equilibrium, output is adjusted to the demand for the various products. In a planned economy, it is believed, proper planning should assure the establishment of equilibrium proportions.
While this idea of 'horizontal' equilibrium proportions undoubtedly points to an important aspect of the relations between the output of the various branches of the national economy, it overlooks the need of maintaining another kind of propor tions, determined not by conditions of consumers' demand, but by conditions of tech nological relations associated with the fact that the output of certain products serves
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Vol. 17 ] SANKHY? : THE INDIAN JOURNAL OF STATISTICS [ Part 4
?entirely or in part?as input in the process of producing other products. We may call this the problem of Vertical' proportions.
This problem of 'vertical' proportions is the subject matter of input-output analysis. The problem was first posed by Quesnay in his famous 'Tableau Econo mique'. Its insight was lost by classical and neo-classical economic theory. A syste matic treatment as well as the fundamental solution of the problem was given by Marx in his schemes of reproduction of capital contained in volume II of Das Kapital. Outside of Marxist political economy the problem was scarcely seen; neo-classical economics confining itself to the study of equilibrium conditions of the 'horizontal' type.
However, in business cycle theory of bourgeois economists the problem of Vertical relations' between investment goods and consumers' goods was bound to reappear, for it is this type of relation which is at the bottom of the phenomenon of crises and depressions. Consequently, it plays an important role in Keynesian theory. The Vertical' character of the relations involved causes that 'disproportionalities' in this field are not automatically solved by the process of competition through capi tal moving from less profitable to more profitable branches of the economy. It also explains why smooth economic development is not automatically assured under conditions of capitalism, even independently of the handicaps resulting from the specific features of monopoly capitalism.
The importance of a study of the Vertical' relations between various branches of the economy, i.e., of input-output analysis, is not limited to conditions of a capi talist economy. As was already pointed out by Marx, since input-output relations are based on technological conditions of production, proper proportions in this field must be maintained in any economic system. A study of such relations is therefore necessary for purposes of socialist economic planning as well as for the understanding of the working-mechanism of capitalist economy. Under conditions of socialism input-output analysis is a necessary tool of ascertaining the internal consistency of national economic plans.
In the socialist countries input-output analysis takes the form of varie us 'statistical balances' which serve as tools of national economic planning. These
balances are conceived as concr?tisations of the general idea underlying the repro duction schemes of Marx, In the USA Professor Leontief has developed a type of input-output analysis which, too, can be conceived as a concr?tisation of Marx's idea of input-output relations taking place in the process of reproduction of the national product. Professor Leontief 's analysis takes explicitly into account the technological relations between output and input. Though applied first to the economy of the USA, this analysis like all input-output analyses is also applicable to a socialist economy. Indeed, it seems to me, that this analysis achieves its full justification only if applied as a tool of economic planning. Its technique, though first applied to a capitalist economy, points beyond the historical limitations of capi talism and can come fully into its own only under conditions of planned economy.
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SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
2. The Marxian schemes
Marx's analysis of reproduction is based on two devices. First, the value of the total national product during a period of time (e.g. a year) is considered as being composed of three parts?the value of the means of production used-up during this period (to be denoted by c?in Marx's terminology the constant capital used up), the value of the labour power directly engaged in production ( to be denoted by v?in Marx's terminology the variable capital, i.e., the revolving wage fund), the surplus generated (to be denoted by s). Thus:
Total national product = c+v-f-s. Here, c is the replacement of the means of production used-up, v-\-s is the total value added (or national income).
Secondly, the national economy is divided into two departments: one produc ing means of production, the other producing consumers' goods. Using the subs cripts 1 and 2 to indicate the two departments, respectively, we shall write:
total output of means of production = cx+vx-\-sx total output of consumers' goods = c2+v2+s2 total national product ? c-\-v-\-s
where c = c3+c2, v ~ vx-\-v2, s = ?x+^g.
In a stationary economy (Marx's simple reproduction) : total demand for means of production = cx-\-c2
total demand for consumers' goods = vx-\-v2-\-sx-{-s2
The total demand for means of production is equal to the joint replacement
requirement of both departments, the total demand for consumers' goods is equal to the joint wage fund and surplus of both departments.
Putting equal demand and output of means of production, we obtain
cx+c2 = cx+vx+sx ... (2.1) which simplifies to c2 = vx+sv ... (2.2) The same result is obtained from putting equa] total demand and output of consumers' goods.
That is vx+v2+sx+s2 = c2+v?+s2. ... (2.3) This is so, because the total national product c-\-v-\-s is being given . Equation (2.3) can be deduced from equation (2.1).
Equation (2.2) indicates an input-output relation between the two depart ments of the national economy. Indeed, let us write,
ci + *>_+*_ _^- ... (2.4)
j C2 + ^2 + ?2 30?
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Vol. 17 ] SANKHY? : THE INDIAN JOURNAL OF STATISTICS [ Part 4
Department 1 produces means of production. Part of its output equal in value to cx is retained within the department for replacement of the means of production used up. The remainder (in the rectangle) equal in value to vx+sx is transmitted to department 2 in exchange for consumers' goods. Department 2 produces consumers goods. Part of its output equal in value to v2+s2 is retained within the department for consump
tion. The remainder in the rectangle equal in value to c2 is transmitted to depart ment 1 in exchange for the means of production needed for replacement of those which
were ?sed-up. In order that production goes on smoothly, the output of the two departments must be co-ordinated in such a way that a balanced exchange takes place between the two departments, i.e., c2 = vx+sx. The above table (2.4) thus indicates the input output relations between the two departments: equation (2.2) gives the condition of proper balance between the two departments.
In an expanding economy (Marx's expanded reproduction) not all the surplus is consumed; part of it is accumulated to increase the amount of means of production and to employ more labour power. We shall express this by writing,
s = s+sc+sv
where s is the part of the surplus consumed, sc the part of the surplus used to increase the amount of means of production, sv the part of the surplus used to employ more labour power.
Dividing as before, the economy into two departments, we have,
total output of means of production = c1+v1+81+sl?+slv
total output of consumers' goods = c2+v2+s2+s2e+siv total national product = c+v+s+sc+sv.
Furthermore;
total demand for means of production = c^+^+s-^+s^ total demand for consumers' goods = v1+v2+slv+s2iB+Si+?2'
The total demand for means of production is equal to the joint replacement and ex pansion requirement of both departments. The total demand of consumers' goods is equal to the joint wage fund, the joint expansion of the wage fund and the joint surplus consumed in both departments.
Equality of demand and output of means of production implies
C1 + *U + C2 + S2c = Ci+?i+*i+*fc+*i, ... (2.5)
which leads to ^+s2c ~ ?;i+^i+ %* (2.6)
The same result can be obtained from the condition of equality of demand and output of consumer's goods.
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SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
Equation (2.6) indicates the input-output relation between the two depart ments in an expanding economy. It can be presented by means of the following table :
Cl + Slc +: ^l + ^l + Sl?
iC2 + 52. 1+ *>2 + 52 + *2* 7)
In department 1 part of the product equal in value to cx-\-sXc is retained within the department for replacement of the means of production used up and for expansion of the amount of means of production in the department. The remainder (contained in the rectangle) is transmitted to department 2 in exchange for consumers' goods. In department 2 part of the product equal in value to ^2+^2+52. ^ retained for consump tion. The remainder (contained in the rectangle) is transmitted to department 1 in exchange for means of production for replacement of the means of production used up and for expansion of the amount of means of production in the department. The proper balance between the two departments is thus expressed by equation (2.6).
3. Input-output relations in a multi?sector model
Professor Leontief's input-output tables are designed to study the relations between a larger number of sectors of the national economy. Let the economy be divided into n production sectors denoted by the indices 1, 2, ..., n. Denote by X{ the total or gross output of the .-th sector by Xtj the quantity of the product of the i-th sector transmitted to the j-th sector where it is used as input. Further denote by x{ the net output of the i-th sector, viz., that part of the gross output Xi which is not allocated to another sectors to be used there as input. The net output xi can be consumed, exported, or accumulated for the purpose of investment.
We have thus,
X = S Xy+Xi (i =- 1, 2, ...,n). (3.1)
It is convenient to represent the input-output relations between the sectors of the economv in the form of a table as follows:
(3.2)
The items in the square matrix in the center of the table represent the input -output relations, or the 'interflows' between the various branches of the national
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Vol. 17 ] SANKHY? : THE INDIAN JOURNAL OF STATISTICS [ Part 4
economy (also called 'intersector deliveries'.) The column on the right hand side represents the net outputs and the column on the left hand side the gross outputs of the various products. The rows are subject to the balance relation indicated by equation (3.1).
Since the process of production requires not only the use of means of produc tion but also the application of direct labour, we may supplement the above input output table by introducing the amounts of labour force employed in production. Let us denote the total labour force available in the national economy by X0, the labour force employed in producing the output of the i-th sector of the economy by Xm and, finally, by x^ the labour force not employed productively. The latter may be either unemployed (labour reserve) or employed in non-productive occupations, i.e., in occupations which do not produce material goods (e.g., personal services),
With regard to the allocation of the total labour force the following equation holds :
X0 ? S Xi0+x0. (3.3)
Introducing the allocation of the labour force into the input-output table, we obtain the following table
^o ^01 ^02 L0w
xx xxx xx X Ao A, 21 ^22 L2r.
Xn xnX Xn2
r_ r2
(3.4)
The items in the square matrix in the center of the table are 'interflows' for 'inter-sector deliveries'. The upper row in the center represents the allocation of the labour force to the various branches of the economy. Similarly as before, the column
at the right represents the remainder of the labour force not allocated productively (xc), and the net outputs of the various products (xf, i = 1. ..., n). The column on the left hand side represents the total labour force X0 and the gross outputs X% (i ? 1, 2, .... n.) of the various branchas.
The entries in table may be expressed either in physical units or in value units. In the latter case, the table is sometimes called a 'transaction table' rather than our input-output table. Whatever the units, the rows of the table can always be summed, for each row is expressed in the same units (e.g., man-hours, tons, gallons,
yards, pieces). Thus the equations (3.1) and (3.2) hold under all circumstances. We may call them the'allocation equations'.
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SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
The columns, however, can be summed only if the entries of the table are ex pressed in value units (e.g.; rupees) i.e.; if the table is a transaction table, otherwise the items of a column would be non-homogeneous. We shall write these sums in the following form.
?=i (j= h 2, (3.5)
Obviously, Yj is the cost of the output of the j-th branch, Xoj being the cost of the labour force employed and S X^ the cost of the means of production used-up in producing the output. We may call the equations (3.5) the 'cost equations'. The costs of producing the output of the various branches of the economy are indicated in the row at the bottom of table (3.4).
The excess of the value of the output of a branch of the national economy over the cost of producing the output is the surplus produced in this branch. Denot ing the surplus produced in the j-th branch by ?.. we have
3 = *_-*i (3.6)
and in view of (3.5), *i Xoji+ S Xij+Sj i=l (j = I, ...}n). (3.7)
This is the relation which in a multi-sector model corresponds to the Marxian de composition of the value of the output of a branch of the national economy into Cj+Vj-^-Sj (j = 1, 2). Here 2 Xi3 stands for c^ and Xoj stands for vrj in the Marxian notation. The value added in the sector is X^ + Sj.
Introducing the surplus produced in the various branches of the economy into the transaction table and taking account of the relation (3.7) we obtain the fol lowing transaction table:
^ 01 ^M)2 Xn
Xi xxx xx Lnl Xn2
X,
x?
Sx S2 sm
xx x2 xm
... (3.8)
From table (3.8) it is apparent that the gross output of a branch, say X%, can be obtained either by summation of the entries of a row or by summation of the entries of a column. Consequently, we have
S X?+zt = X^+S X^+Si (i = 1, ..., n). 3=1 j=l (3.9)
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Vol. 17 ] SANKHY? : THE INDIAN JOURNAL OF STATISTICS [ Part 4
This results directly from the equations (3.1) and (3.7). On both sides of equation (3.9) Xii is appearing under the summation sign : it is the part of the output retained in the sector for replacement. Eliminating Xt? from the equation, we obtain
2 Xi?+xi = Xoi+___ Xfi+Si (i = 1, ..., n). ... (3.10)
This equation states that (measured in value units) the outflow from the sector to other sectors?plus the net output is equal to the inflow from other sectors plus the value added in the sector.
Equation (3.10) is the analogue, in a multisector model, of the Marxian equa tions (3.2) and (3.6) of the previous section which hold in a two-sector model. The mentioned Marxian equations are obtained?just like equation (3.10)?by putting equal the value of the output of the sector and the total allocation of the sector's out put and by eliminating on both sides the part of the output retained in the sector.
In order to see the exact analogy of equation (3.10) and the equations of the Marxian two-sector model, let us transform equation (3.10) in the following way. Suppose that the net output xi is partly reinvested in the sector and partly consumed or allocated to other sectors; the corresponding parts will be indicated by x\ and x respectively. Thus we have
Xi = ?i+x? (?=l,...,rc). (3-11) Further, suppose that the surplus produced in the sector is used partly for
consumption, partly for employment of additional labour force in the sector, and partly for addition to the means of production used in the sector. Denote these quantities by Si Si0 and x\ respectively. Thus
S{ = ?i+Si0+x[. ... (3.12) Substituting (3.11) and (3.12) into equation (3.10) and eliminating x\ on both sides, the equation reduces to
S Xi}+x? = S _fji+Xoi+?*?o+S< (i = 1, ..., n). ... (3.13)
In this form not only the quantities X? retained in.the sector for replacement but also the quantity retained in the sector for expansion is eliminated. Equation (3.13) states that the net outflow to other sectors and to consumption is equal to the inflow from other sectors and to the part of the value added not retained in the sector. This is the exact counterpart?in a multisector model ? to the Marxian equation (3.6) in the previous section.
If the number of sectors is reduced to two, equation (3.13) becomes identical with equation (3.2) of the preceding section. In this case (3.13) reduces to
X12+x? = X21+X01+S10+Sv ... (3.14) 312
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SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
The corresponding transaction table takes the form:
X0 ; Z01 ^02 *oi + **_ + Xo
xx\ xx 12 i ?1 +
X2 X2X X99 +
s. 10 s2 s. 20
(3.15)
Sector 1 produces means of production, sector 2 produces consumers' goods. As consumer's goods are not a means of production, X2X ? 0, and as means of produc tion are not consumed, x"x are the means of production allocated to sector 2 for expan sion. Using the notation of the preceding section, we shall write:
Xox = vx ; X{ Ln
02
^i > XX2 ? c2 ; Xon ? 0 L21 Xn - Oi 2c? &in = * ^10 1.
Thus equation (3.15) takes the form C2 + 52. = ?>1+*1?+*1
which is identical with equation (2.6) of the preceding section. In a stationary eco nomy, s2c ? slv = 0, and the equation reduces to c2 = vxJrsx, i.e., to equation (2.2) of the preceding section.
It should also be noticed that of the equations (3.10) or (3.13) (which are equi valent to (3.10)), only n?l are independent. From the transaction table (3.8) it is apparent that
S (2 Xq+xJ __ S (Xo?+S Xfi+St) ^Sli ... (3.16) i j i i i This implies directly that one of the equations (3.10) can be deduced from the remain ing n? 1. This corresponds to the property of the Marxian two sector model where only one relation like equation (2.6) or (2.2) of the preceding section holds between the two sectors.
Eliminating the double sums on both sides of the identity (3.16), we obtain
S a:i=-SXo?+S 8i ... (3.17) i i i which indicates that the net product of the national economy, or national income is equal to the total value added during the period under consideration.
4. Technological relations and value relations
In order to study the effect of the technological conditions of production upon
input-output relations we have to distinguish sharply between input-output tables expressed in physical units and transaction tables which are expressed in value units. For this purpose we shall use a separate notation.
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Vol. 17 ] SANKHY? : THE INDIAN JOURNAL OF STATISTICS [ Part 4
The physical output of the i-th sector will be denoted by Qi9 the physical net output by q% and the physical interflow from the ?-th to the j-th sector by q{j (i, j ? 1, ...9n). The physical total labour force (measured, for instance, in properly weighted
man-hours) will be denoted by Q0i the physical labour power employed in the i-th sector by qQi and the remainder not employed productively by q0. The physical input-output table can thus be written in the form
Go #01 #02 . #0r. ! #0
Qi \ #11
Q2
Qn
#21
#12
#22
?1? I #1
#2n | #2
#n2 . Sift? I 2n
... (4.1)
The rows of the table are subject to the allocation balance
Gi = S #?;+#? (? = 0, 1,2, ...9n). (4.2)
The technological conditions of production can be described by the technical coefficients, called also coefficients of production :
(i 0, 1. n\j 1, ...,n). (4.3) aa = 9islQj The coefficient aoj indicates the labour power employed in producing a unit of output of the j-th sector, the remaining coefficients a^ indicate the amount of output of the ?-th sector needed to produce a unit of output of the j-th sector.
In the socialist countries the values of these coefficients are generally available in form of the 'technical norms' used in planning and administration of production. These norms indicate the amounts of labour power, raw materials etc., which are al lowed to be used per unit of output. In the absence of such 'technical norms' in the industries the technical coefficients can be obtained approximately from statistical input-output tables, according to formula (4.3). This method was employed by Professor Leontief.
Introducing the technical coefficients (4.3), the allocation equations (4.2) become
Ci = S ?ti ?i+?i (* =?> h...,n)> i It is convenient to separate the first equation relating to labour power from the remain ing ones. We have then
i
and the remaining equation can be written in the form
(i = 1, ...,n). (1??
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
Thus the equations (4.5) can be solved separately from equation (4.1). The matrix of the coefficients of these equations
A? axl, -~aX2 . ? aXn
^ anl> an2> . 1 ann is called the 'technical matrix'. It describes the technological conditions of produc tion.1
In the system (4.5) there are n equations and 2n variables, i.e., the gross out puts Qx, ..., Qn and the net outputs, qx, ..., qn. If the technical matrix is non-signular as we shall assume to be the case, there are thus n degrees of freedom. We can fix in the national economic plan the net outputs qx, ..., qn and the gross outputs Qx, ..., Qn are then uniquely determined by the equations (4.5). Or, instead, we can fix in the plan the gross outputs and the net outputs available which will result uniquely from the equations. Or, finally, we can fix in the plan a number of gross outputs and of net outputs, together n in number ? and the remaining n gross and net out puts are determined by the equations.
If the technical matrix happens to be singular, the number of degrees of free dom is increased according to the order of nullity of the matrix. Thus if the rank of the matrix is m (m < n), the order of nullity is n?m and the number of idegrees of freedom is n -f- n?m. Thus we must fix in the plan 2n?m variables, the remaining m variables being then obtained from the equations (4.5).
Having the gross outputs Qx, ..., Qn either from the equations (4.5) or directly from the plan, we can substitute them into equation (4.4). This gives us the total
n
labour force employed 2 a^Q?, and taking the total labour force Q0 as a datum, j=i we can calculate qQ i.e., the labour force remaining outside productive employment.
To show the relation between the transaction table and the physical input-out put table (1), we must take explicitly account of prices. Denote by p0 the remunera tion of a unit of labour force, and by px, p2, ..., pn the prices of the products of the various sectors. Further pf0 denotes the earning of the labour force not employed in production. We have then
Xi =PiQi, xi ^PiQi ... (4.7) ?o = _??3o>
Xij = V?iy 1 It should be noticed that this technical matrix differs from the matrix used by Professor Leontief
in so far that in Professor Leontief's matrix the coemceints an in the diagonal are absent; his diagonal consists only of unities. This is due to the fact that he does not take into account the fact that part of the output is retained in the sector as means of production, e.g., part of the output of agriculture is retained as seed and as fodder for breeding of animals, part of the coal is retained in the coal mines on fuel etc. If
the number of sectors in the model is small, the sectors being accordingly large, this omission may be serious.
... (4.6)
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We shall also denote by IIj the surplus per unit of gross physical output of the sector, i.e.,
St^UiQi (i =1, ...,?). ... (4.8) Introducing these relations into the transaction table (4.8) of the preceding
section we obtain the following form of the transaction table:
Pt&loj+PoVo _>0_01> _>0.02> _Wo ! P'o -o
PiQi | _>i_n Pi??? .>-Mi? PiQi i _>2_21 i>2_22.- .>?>2_2?
__?1
_>2_2
PnQn \ PnSnl ->n_n2>.> Pnlnn ? Pnln
UiQi n3?2 .,UnQn PlQl 2_*-S .'PnQn
(4.9)
Summing the columns we obtain the equations
_.-w+2 PAi+n&? = PiQ, j
which are identical with equations (3.7) in the preceding section. Taking account of the technical coefficients (a?), these equations can be written.
or, more conveniently, ( 1?^)3?,?s a^-a^Po = -I?
The matrix of the coefficients is
(4.10)
m>
?a In?
*21>
~a2n>
-anX, ?a{ 01
j 1 ann> a0
... (4.11)
There are n equations and 2n+l variables i.e., n prices 4.-, ...,pn the wage rate p0 and n per-unit surpluses, ni? ..., nn. If the matrix is of rank n, there are thus n+1 degrees of freedom. We can fix, for instance, the wage rate pQ and the per unit surpluses^, ...,Un, the n prices are then uniquely determined. Or, instead, we can fix the n prices mentioned and the wage rate, the per unit surpluses are then uniquely determined, or any other combination of n+1 variables can be fixed, the n remaining ones resulting from the equations.
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SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
If the rank of the matrix is less than n, the number of degrees of freedom increases correspondingly. The important point to be noticed is that these relations between prices of products, wage rate and per unit surpluses are entirely determined by the technological conditions of production as represented by the technical matrix of the coefficients of equations (4.10). The nxn submatrix containing the first n columns is simply the transpose of the technical matrix (4.6).
Now we can show the relation between the physical input-output relations and the input-output relations in value terms as expressed in a transaction table. The rows of the transaction table (4.9) are subject to the allocation balance
PiQi = EPi?0+_Mt i
or, introducing the technical coefficients according to (4.3)
PiQi ='S Pid^+P?i This can also be written in the form
PiQl = xa'i}pJQ9+piqi ... (4.12)
where a{j = (pjpj )a{j (i,j=l,...,n). ... (4.13) In view of (4.7), the equations (4.12) can be written in the form
Xi = S a't?Xi+xi
or (l-4)Zt+ 2 a?Zi = x{ (i = 1, ..., n).(4.14) 3?*i These equations establish the relations between the value of the net outputs xx, ..., xn, arid the value of the gross outputs of the various sectors.
i ' ' The matrix of the coefficients of these equations is
. ~a'ln \
. ) ... (4.15)
i.e., analogous to the matrix (4.6), only that the coefficients aio appear instead of the coefficients a^.
The coefficients d.? can be written in the form
a. y = XijIXj (?,j=l, ...,?). ... (4.16) They indicate the value of the input of the product of the .-th sector (i= 1,_n) required to produce a unit of value of output of the ^'-th sector. We shall call these coefficients the 'input coefficients'.
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Vol. 17 ] SANKHY? : THE INDIAN JOURNAL OF STATISTICS [ Part 4
In addition, input coefficients of the type
aoj = X'oiIXi ... (4.17) can be introduced which indicate the value of direct labour power needed to produce a unit of value of product of the j-th sector. With the aid of these coefficients the value of the total labour force employed in production can be calculated, i.e.,
X?-_? = Za^- ... (4.18) j The input coefficients derive their significance from their simple behaviour
with regard to aggregation of two or several sectors into one single sector. For ins . tance, let us aggregate the j-th sector and the fc-th sector and denote the new sector thus obtained as the l-th sector.
The value of the gross output of the new sector is then
Xf^Xf + Xt ... (4.19) and the value of the part of the product of the i-th sector allocated as input to the new sector is
Xa = Xii + Xa ... (4.20) The new input coefficient is, consequently.
In view of the definition (4.16), this is equal to
a' _= a'iiXi+a?*Z* ... (4.21) Xj+Xt
i.e., the new input coefficient is the weighted mean of the input coefficients before aggregation.
The input coefficients can be given a simple interpretation on the basis of the Marxian theory of value. If the prices of the products express the amount of socially necessary labour required to produce a physical unit of output, the input coefficients indicate the quantity of social labour engaged in one sector necessary to
produce in another sector a unit of value (i.e., an amount representing a unit of social labour.) This quantity is entirely determined by the technological conditions of production. The transaction table indicates the allocation of the social labour among the various sectors of the national economy and shows the interflow of social labour between the various sectors of the economy. Aggregation of sectors can be performed
by mere summation and the input coefficients are transformed under aggregation by simple averaging.
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SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
The Marxian theory, however, points out that in a capitalist economy prices do not exactly reflect the amount of social labour necessary to produce a unit of output. Systematic deviations arise between the 'prices of production', i.e., equi librium prices under competitive capitalism, and the values of products measured in labour. These deviations are the result of the technologically determined differences
in ratios of capital goods and direct labour employed on one hand, and the equalisa tion of the rates of profit by competition on the other hand. Monopoly produces further systematic deviations. Consequently, transaction tables of a capitalist economy give only an approximate picture of allocation of social labour. In a socialist eco nomy transaction tables give a picture of the allocation of social labour to the extent that prices express the amount of social labour required in production. Therefore, in a socialist economy, a proper system of prices reflecting the amounts of social labour
required in production is a necessary instrument of effective accounting of the allo cation of society's labour force among the various branches of national economy.
5. Consumption and investment
The net output of any sector of the national economy may be consumed, exported or accumulated for future use. Accumulated output may be designed for future consumption or allocated to increase the quantity of means of production, i.e., invested in the process of production. In the first case we shall consider it as another form of consumption; the last mentioned use will be called productive invest ment. The part of the net output exported can be considered as destined for consump tion or productive investment in proportion as the goods imported in return consist of consumers' goods or means of production. Thus the total net output of a sector may be divided up into a part consumed and a part utilized for productive investment.
Consider the net physical output qi of the i-th sector and denote the part consumed by q[1] and the part invested productively by q[2). Then
_* = ifM-??'. - (5.1) Further
?. = ?m;
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In order that these have a non-trivial solution it is necessary that
l au kx clx, ~~aX2, . aln
. ... (5.5)
anl ? ~an2> . * ann *n an
= 0
i.e., the rates of consumption and rates of investment of the various sectors cannot be fixed independently of each other. Their mutual relations depend on the rank of the matrix of (5.5).
This may be conveniently illustrated by the example of a two sector model. Taking the sectors 1 and 2, the determinantal equation (5.4) becomes
(l~-axx?kx?ocx)(l?a22?k2?a2) = aX2a21 ... (5.6)
or l?axx ? kx ? a,x _ a2i_ ... (5.7) aX2 1 ^22 ^2 *^2
This means that the fractions of the gross output of each sector going to the other sector for current use in production, i.e., \?aii?ki?ai is proportional to the technical co-efficients relating the two sectors to each other. It is seen from (5.6) that if the rates of consumption are kept constant, the rate of investment of one sector can be increased only at the expense of reducing the rate of investment of the other sector. A similar relation holds for the rates of consumption of the two sectors, if the rates of investment are kept constant.
Now suppose that sector 1 produces means of production and sector 2 pro duces consumers' goods. Means of production are needed to produce consumers' goods but themselves are not consumed; consequently, aX2 > 0 and kx = 0. Consuers' goods are only usable for consumption; they are neither needed currently to produce means of production nor are they investable in production. Consequently, a2X = 0 and
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
In a socialist economy distribution of the national product is based on the remuneration for labour performed. Under capitalism it depends also on property in means of production which permits certain classes to appropriate the surplus gene rated in production. Therefore, in a socialist economy the rates of consumption are related to the remuneration of the labour force both in productive and non-productive employment. In a capitalist economy they depend also on the use property owners make of the surplus they appropriate.
In order to determine the rates of consumption, it is best to start from a tran saction table. We have seen in section 3, equation (3.17), that the net product of the national economy is equal to the total value added in production, i.e.,
S a< = E ^ot +2 S{. i i i
Introducing the rates of consumption and of investment, we can write this in the form
EiiIj = _Ioi+_Si-_aiI, ... (5.8)
The left hand side of this equation represents the part of the total value of the net product of the economy (national income) devoted to consumption.
Let Wi be the fraction of the part of the national income devoted to consump tion spent for the product of the i-th sector (i = 1, ...,n). We consider these frac tions to be 'behavioural data' and shall call them 'consumption parameters'. Then
k Xi = Wt (2 Xm +S -Sj-S ??Xi), (i = 1, ..., n; S W{ =1). ... (5.9)
(The subscripts in the summation signs on the right hand side are denoted by j in order to avoid confusion with the subscript i on the left hand side).
Introducing input coefficients and writing
sJ = n'.xj (j = i,...,?) ... (5.10) we can write
? iii = (f1(.
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In order that these equations have a non-trivial solution we must have the determinant
(5.13)
i-^i-^i-WiKi+n;-^),.-ain-tTiKn+n;-^)
-
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
where 8^ = 1 for i = j and 8{j ? 0 for i ^ j. This equation contains the wage rate p09 the product pricespx, ...,pn and the per-unit surpluses Ul9... Un. These quantities cannot be eliminated from the equation.
Thus when the rates of consumption are determined by 'demand equations' like (5.11) linking them to the national income, the relation between the rates of invest
ment in the various sectors of the national economy cannot be expressed in purely physical and technological terms. They have to be expressed in value terms and are found according to (5.13) to depend on the input coefficients, the rates of surplus
U'v.., Wn and the consumption parameters Wx..., Wn of the various sectors.
As in the light of the Marxian theory of value the input coefficients can be interpreted as indicating technological conditions of production, the relations between the rates of investment are found to depend, in addition to the technological condi tions of production, on behaviourial parameters relating consumption of the various products to national income and on the per-unit surpluses in the various sectors. The latter can be considered as 'sociological parameters'. In a capitalist economy they are equal to the proportion of the value of each sector's output appropriated by the owners of means of production. In a socialist economy the surpluses are set by considerations of social policy, providing the resources for productive investment and for society's collective consumption.
6. Investment and economic growth
The part of the net outputs of the various sectors invested in production is added to the means of production available in the next period. This makes possible in the next period an increase in the output of the various sectors of the national eco nomy. The investment done in one period adds to the amount of means of produc tion in operation in the next period. In consequence, a larger output is obtained in the next period. The outputs of successive period (years, for instance) are linked up in a chain through the investments undertaken in each period. Thus, productive investment generates a process of growth of output.
Let Q?t) be the gross physical output of the i-th sector of the economy during th? time period indicated by t9 e.g., the year 1955, and let oti be the rate of investment of the i-th sector as defined by (5.2) in the preceding section. The quantity of the out put of the sector invested is thus a?Q{(. ). By this amount increases the stock of product of the i-th sector available in the economy as means of production.
This increment is partly retained in the sector and partly allocated to other sectors. Denote the increment allocated to the j-th sector by Ag^- (.), (i,j = 1.... n.) The index t indicates the period during which the allocation takes place.
We have a{Q{(t) = S A q^t). ... (6.1) 3 However, not all the increment allocated is used-up by the various sectors
during a single unit period of time. For instance, if it consists of machines or other durable equipment it will last for several units of time (years) and only a fraction of
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it is used up during a unit period of time. Let the durability of the part of the output
of the i-th sector allocated to the j-th sector as additional means of production be T^ units of time. T^ is taken as a parameter given by the technological conditions of production and may be called the 'turnover period' of the particular type of pro
ductive equipment. The reciprocal of the turnover period, i.e., 1/T7^ is the rate of used up per unit of time, it is also called 'rate of replacement' or 'rate of amortisation'.
In order to produce a unit of physical output of the product of the j-th sector
during a unit period of time the quantity a{j of the product of the i-th sector must be used up during that period of time; a{j is the technical coefficient. Thus to increase in the next period the output of the j-th sector by an additional unit, the quantity of output of the i-th sector a{j T{- must be allocated to the j-th sector. Then exactly ai;- of output of the i-th sector will be used-up in the next unit period in the sector and this will produce one unit of output.
The quantities bi3=ai3Ti? (?,?= 1_ ...,W) ** (6'2)
may be called the 'investment coefficients'. The investment coefficients indicate the quantity of output of one sector which must be invested in the other sector in order
to increase by one unit the other sector's output in the next unit period.
The investment coefficients as well as their reciprocals reflect technological conditions of production; given the technical coefficients, the investment coefficients are proportional to the turnover periods of the various types of means of production.
Write Qj(t) for the physical gross output of the j-th sector in the unit period under consideration and Q?(t+1) for the physical gross output of this sector in the next unit period. An increment of output of the j-th sector equal to Q)(t+\)?Q?) requires the investment in the sector of the following quantity of the output of i-th sector.
Ag? = b^Qi (t+1 )-Q, (?)] (i, j = 1, ..., n). ... (6.3) In view of (6.1), we have
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
the matrix of the investment coefficients. The increments of output in the various sectors are then
Qi(t+i)-Q?t) = ?Y, l??l*A(t) (6.6)
where |_?| is the determinant of the matrix B and |_?;, lis the co-factor of the element.
It is convenient to write
5, = \B\ and express (6.6) in the form
Qj(t+l)-Q}(t) = IiBijxiQi(t) (3 = 1, n)
(6.7)
(6.8)
The coefficients B{j indicate the increment of output obtained in the j-th sector from an additional unit of the i-th sectors' product invested in the j-th sector. They may be called 'interseetor output-invest ment ratios'. The matrix of the coefficients B{j, is the inverse of the matrix B.
The increments of output in the various sectors depend on the investment coefficients and on the amounts of product of the various sectors invested. The investment coefficients, in turn, depend on the technical coefficients and turnover periods. By virtue of (6.2) the matrix of investment coefficients can be presented as follows:
all^ 11 > al2^ 12 " . aln* In
B = (6.9)
an\l nl> an2* n2 a T
In this way the investments done in one unit period lead to an increase of output in the next period. If the rates of investment remain constant, the invest ments in the successive unit periods are,
ociQi(t+l),aiQi(t+2), ., (i=l,...,n). The investments of the first unit period t are the initial 'shock' which sets in motion the process of economic growth. The investments in the successive unit periods carry the process forward from one stage to another.
The course of the process of economic growth can be deduced from the equa tion (6.4) or, for that matter, also from the equivalent equations (6.8). These are linear difference equations with constant coefficients. The characteristic equation of the system (6.4) is
?i+Ml-A), 6ia(l-A), ..., yi-A)
0 =
&ni(l-A), bH2(l-A), ... ann+bnn(l-A)
... (6.10)
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The solution of the difference equations indicating the gross output in the unit period t8 can be written in the form
?,(*.) = S
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
logical structure of the economy and on the rates of investment chosen. The process of economic growth, however, can also be presented in value terms.
In such a case, the technological investment coefficients b^ are replaced by a set of coefficients,
&', =-AXt (?, j = 1, ...,n)< ... (6.16) " X5(t+l)-X?(t) V 'J } K }
indicating the value of the output of the i-th sector which must be invested in the j-th sector in order to obtain in the latter a unit increment of output value. These coeffi cients may be called 'investment-outlay coefficients' or simply, 'outlay coefficients.'1
In view of the relations (4.7) in section 4, the outlay coefficients are related to the investment coefficients as follows:
6_= g--V - (6.17) Taking into account (6.2), they can also be written in the form:
Pj
Using the relations (4.7) of section 4 the difference equations (6.4) express ing the relations between investments in the various sectors of the economy and the increments of output obtained can be written in the value form:
a,Z,(i) = S b'^Xfi+V-Xfi)], ... (6.19) 5 and the solutions of these equations are obtained by means of their characteristic equation which is
xx+b'xl(l-A), . &;?u-A)
0= ... (6.20)
?nl(l-A), ... ..., xn+b'nn(l-X) The process of growth of the value of the output of the various sectors of the
economy is thus determined?given the values of the initial outputs Xx(t0), ..., Xn(t0)
by the outlay coefficients bi;j and the rates of investment a^.
Usually the term 'capital-coefficients' is used to denote the outlay coefficients. For reasons exposed by the Marxian theory the term 'capital' is not appropriate in a socialist economy because it covers up the fundamental difference between the role of capital as value of means of production used to appro priate by their owners the surplus produced in the national economy and the role of means of production as an instrument in the physical process of production. We, therefore, prefer to use the term 'outlay coefficients', meaning by 'outlay' the money value of the physical investments.
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The outlay coefficients behave under aggregation of two or several sectors into one sector in a similar way like the input coefficients. The outlay coefficients of the new sector resulting from aggregation are the weighted means of the outlay coefficients of the sectors aggregated.
Indeed, denote by the subscript I the sector resulting from aggregation of the
j-th sector and the fc-th sector. The outlay coefficients of the new sector are then
J?~ x?t+i)-XAt).
Since rAXa = AX0 + AXik Xl(t) = X}(t) + Xk(t)
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
consist entirely of two factors. One are the technical coefficients indicating current input-output relations during a unit period. The other are the turnover periods which simply indicate the durability of the various means of production and, consequently the rate of use-up of the means of production in a single unit period of time.
This disposes definitely of any mystical notions about the productivity' of a mythical entity 'capital' conceived as a separate factor of production distinguished from the physical means of production. Such metaphysical entity is proved to be non existent.
In a capitalist economy 'capital' consits of private property rights to means of production which permit the owners of the means of production to appropriate the surplus produced in the national economy. 'Capital' is the power to appropriate surplus. This power, under capitalism, is measured by the money value of the means of production and hired labour power a person (or corporation) can command. In a socialist economy such property rights are absent. There exist simply physical means of production and certain technological conditions expressed by the technical coe fficients and turnover periods. From these technological conditions there result certain consequences concerning the quantity of social labour which must be 'stored up' in order to achieve a planned increase in output. Thus there is no need in a socia list economy for any concept of 'capital'. Such concept would only obscure the techno logical character of the conditions of the process of economic growth.
7. Effects of investment on national income and employment
The equations (6.19) of the preceding section can be transformed in a shape analogous to equation (6.8), i.e., in a shape which presents the increment of the value of output of a sector of the national economy as a linear combination of the invest ments undertaken in the various sectors. For greater generality it is convenient to consider the rates of investment, av as variable in time, i.e., a{ (.). We obtain then,
Xi(?+l)-I)(?) = S?,'iai(i)Ii(?) (j=l, ...,?). ... (7.1) <
The coefficients B'{) are the elements of a matrix (B^)"1 which is the inverse of the matrix of the outlay coefficients
(Kv ?_2> .> b'xn y : : : J ... (7.2)
This means that,
*; = -!qjfj ; (i,j=l,...,n,) ... (7.3) where |_3'| is the determinant of B and \B^\ is the co-factor of the element b'?.
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The coefficients B'^ may be called 'intersector output-outlay ratios'. They indicate the increment of the output (measured in value) of the j-th sector resulting from a unit increase of investment outlay in the .-th sector.
Summing the equation (7.1) over all sectors of the national economy, we obtain
S [i, (t+l)-X} (t)] = _2 B?j ?, (t) X, (t) } ?
or, writing fit = S B'^ (i _= 1,..., n). ... (7.4) i
S {X, (?+-)-_-, (t)) = S fit at (*)__, (t). (7-5) i i
The left hand side of equation (7.5) is the increment, from one unit period to the next, of gross national product. The coefficients ?i on the right hand side indi cate the effect of a unit increase in investment outlay in the various sectors of the economy on national gross product. They can be called simply 'output-outlay ratios' of the various sectors.
A further simplification of equation (7.5) can be achieved by expressing the investment outlays in the various sectors as a fraction of the total investment outlay in the national economy. Denote by a(. ) the overall rate of investment in the national economy during the unit period t. The total investment outlay during the unit period is
a(t) S X?t). i
Denoting further by /?? (?) the proportion of the total investment outlay which is undertaken in the i-th sector of the economy, we have
at (t) Xt (?) = fit (t) a(t) S Xt(t) ; ... (7.6)
(pi(i)=l). Substituting the relation (7.6) into equation (7.5) and observing that
S Ii(?) = _Ij(
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
Since 2 /i{ (t) = 1, ? can be interpreted as the average output-outlay ratio of the na i tional economy. Equation (7.7) can thus be expressed in the simple form
r(t) = oi(t)?(t). ... (7.9)
Thus the rate of increase of gross national product is the product of the overall rate of investment and of the average output-outlay ratio.
Now we can calculate the effect of a given investment programme upon gross
national income after a number of unit periods of time. Let 2 X3(tQ) be the gross j national product in the initial unit period t0, and let the investment programme be given by the overall rates of investment a(.0), ..., a(.n) and the fractions /??(?0)> /?i(U of the total investment outlay allocated to the various sectors of the economy, (? = 1, ..., n). We obtain, then, the average output-outlay ratios, /?(.0), ... ?(tn). The gross national product in unit period t8(t8 > t0) is,
h
SXi(.,) = T[ [l+a^raSljtg. ... (7.10) til If the overall rate of investment a(.) and the allocation fractions ?i^t) are the
same during each unit period, say a and /.?, this reduces to
S X,{t,) = (l+oc ?)h~t0. S Xfa). ... (7.11) 3 3 National income is the value of the total net output of the national economy.
The value of the net output of the i-th sector in unit period, t is according to the al location equation (4.12) or (4.14)
xi(t) = Xi(t)-Za'ijX}(t), ... (7.12) 3 where the a'^ are input coefficients. National income in unit period t thus is
S^(0 = 2Xi(.)-SXi(.)S
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ment). The factor itself indicates the fraction of gross national products which consti tutes net product, i.e., national income.
Since national income differs from gross national product by a constant multi plier, the rate of increase of national income is necessarily equal to the rate of increase of gross national product. Consequently, the relation (7.9) holds for national in come as well as gross national product.
Furthermore, we find that national income in unit period ts is related to national income in the initial unit period t0 (ts > tv) by formulae analogous to (7.10) and (7.11), namely,
Sa,i?) = ][[l+a(Oii(0]Sa:j(gi ... (7.14) tu and, in the case when a(t) = const and fi(t) ? const
Srj(/1) = (l+a/?),'-'?.ExJ-(g. ... (7.16) 3 3 The total employment generated by the gross national product is calculated as
follows. Denote, as in section 4 by a'0? the input coefficient indicating the value of direct labour force needed to produce a unit of value of product in the j-th sector. We shall call them for convenience 'employment coefficients'. The total employment (in value units) corresponding to gross national product in unit period t is, according to the balance equation (4.1)
2 a'ojXp). 3
Consequently, the increment of total employment from one unit period to the next is S a^ [X (t+l)-X (.)]. J 3 3 Taking into account equation (7.1), we find
S aoj [X (t+l)-X (.)] = 2 a'oi S _B?- a?t)Xi{t)9 j j j j i
or, in view (7.6),
2 aoj [Xfi+V-Xfi)] = S a'0J ? B'.j^(t) ce (t) ZX?1). ... (7.16) 3 j i i
This expression can be simplified as follows. Write
7t = 2a'0iB'ii (i=l,,..,n), ... (7.17) 3 y{ is the additional amount of employment (in value units) created in the national economy by a unit increase in investment outlay in the i-th sector of the economy.
We may call it the 'employment outlay ratio' of the i-th sector. Then we obtain
Sa^I^+l)-!^)] 1-??-= a(t) s 7i ix?t), SAjl-) t i
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SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
or, by introducing the average employment-outlay ratio of the national economy
yW = Sy?jM0, - ("8) i Sa'JI/?+lj-I/i) ? = a(?)y(?). ... (7.19) S X?) 3
The left hand side of (7.19) indicates the increment of total employment from one unit period to the next in relation to the value of the gross national product in the initial unit period. Let us write,
2%.Zi(.) ?*>-w- - (7'20) 3
i.e., the average employment coefficient of the national economy. Substituting this into (7.19) we obtain the rate of increase of total employment from one unit period to the next;
Za'0jXj{t+l)-Xj(l)_ ^^ Za'ojXjV) '" a'0(t) ' 3
ovs denoting the left hand side by p(t),
/KO = ?%-(,). .- (7.21) *o(0 Thus we find that the rate of increase of total employment is the product
of the rate of investment and the average employment-outlay ratio divided by the average employment coefficient of the national economy.
The total employment in unit period t is related to the total employment in the initial unit period tQ(ts > tQ) by the formula
2 a'0j Xs(t8)= ]\[l + ^\A] 2 a^Xfa). ... (7.22)
Comparing (7.21) with (7.9), we can establish a relation between the rate of increase of employment and the rate of increase of national income (or, which is the same, of gross national product.) Denote by v(_) the ratio of these two rates, i.e.,
v(*)=i-W; ... (7.23) W r(t) V ;
we have v(.) = -i- . gij ; ... (7.24) a (.) /?(.)
i.e., this ratio is proportional to the ratio of the average employment-outlay ratio and the average output-outlay ratio.
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Total employment grows faster, equal or slower than national income accord ing as to whether
-? = fl
SOME OBSERVATIONS ON INPUT-OUTPUT ANALYSIS
where I(.) = 2 Xj(t) is the national income in unit period . and c is a factor of proportionality (0 < c < 1). Then,
_(i) = c/(0rw ... (7>28) ?o(0 Taking into account relation (7.14), we find that in any given unit period
h (h < ?o) the rate of increase of total employment is
tk
P('*) = c^\ Wo) IT (!+*(*)>> - (7-29) a?(tk) ttt0 where I(t0) is the national income in the initial unit period, .0.
Thus the rate of increase of total employment in any given unit period is proportional to the increase of national income which took place between the initial unit period and the unit period under consideration.
In expression (7.29) y (tk) depends on the values of the investment allocation fractions /i?tk) (i = 1, ..., n) in unit period tk whereas r(t) depends on the values of the allocation of investment fractions ???t) in all the unit periods from tQ to tk. This can be seen immediately from the formulae (7.8), (7.9), and (7.18). A change of the values of the allocation (of investment) fractions in each period from .0 to tk thus pro duces a change in the rate of increase of total employment in unit period tk equal to
tk ty
dp(h)= ?} ^o)[J?(i+^))?7(y+r(y^n(1+r(?))] - (7-30) t=to t = to The change is positive zero or negative according to the sign of the expression
in braces on the right hand side, i.e., according as to whether
d n (l+r(t)) >
n (l+r(t)) <
The left hand side of (7.31) can be written in the form
*-. t=t0
(7.31)
Hence, the expression (7.31) becomes
tk > V dr? __ - _____) (7 32)
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Let us start with values of the allocation of investment fractions which in each
unit period from .0 to tk maximize the average employment-outlay ratio y(t). Then change these fractions so as to maximize r(t). In each unit period dr(t) > 0 and dy(tk) < 0 (except in the trivial case when y(t) = ?(t) in each unit period, in which case dr(t) = 0 = dy(t)). Thus the left hand side of (7.32) increases monotonously with the value of tk. By choosing tk large enough it is possible to make the left hand side in (7.32) greater than the right hand side, i.e., to achieve a greater rate of increase of total employment than would be the case if the investment allocation fractions were chosen so as to maximize in each unit period the immediate effect on total employ ment.
Total employment in the unit period t8(t8 > ?? > t0) is according to (7.22)
s